(The following is an edited version of the April 26,
2005 testimony provided by Jack McHugh, a legislative analyst for the Mackinac
Center for Public Policy, to the Subcommittee on Corrections for the Michigan
House Appropriations Committee. The subcommittee was holding an informational
hearing in response to efforts by the administration of Gov. Jennifer Granholm
to close Michigan’s only privatized prison.)

Good morning, Mr. Chairman and members of the committee. I
am here not to express an opinion on the future of the Michigan Youth
Correctional Facility, because we have not studied the details or circumstances
surrounding the facility and any related budget moves. I am here to argue that,
in general terms, by failing to adopt prison privatization, Michigan is walking
away from huge potential savings and doing a real disservice to taxpayers.

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Michigan’s Department of Corrections will spend more than
$1.7 billion from the state’s general fund this year, consuming more than 20
percent of the state’s general fund revenues — far more even in real terms than
what the department spent barely a decade ago. The state’s prison population,
now around 49,000 inmates, has risen by more than 40 percent since the early
1990s. The MDOC requires nearly 19,000 employees, and according to the state
Senate Fiscal Agency, it costs approximately $28,000 each year to imprison an
inmate in Michigan.

Two-thirds of the states, including Michigan, have
privatized some part of their prison system, but we have barely stuck our toe in
the water. Our state has never had more than 1 percent of its prisoners under
private management, and that could drop to virtually zero if the Michigan Youth
Correctional Facility in Baldwin closes. That’s too bad, because several decades
of experience elsewhere demonstrates that states can save money by privatizing
prisons, while experiencing no decline in quality.

An analysis of 28 studies of prison privatization by the
Los Angeles-based Reason Public Policy Institute found that virtually all of the
studies concluded that private prisons save money — typically between 5 and 15
percent — compared to government prisons.[1]
A May 2002 article published by the Harvard Law Review referenced several recent
studies documenting such savings:[2]

Researchers at Louisiana State
University compared three Louisiana prisons, one public and two private. The
researchers concluded that the prisons were "as comparable as reasonably
possible in terms of history, capacity, design, types of inmates, number, gender
and ethnicity of inmates." Privatization produced estimated cost savings of
12-14 percent. The quality comparison was a wash, with the private facilities
faring better in some areas and worse in others.

An Arizona study performed in 2000 by
the state Department of Corrections compared three private prisons with fifteen
public ones. The study found average savings of 13.6% at the private prisons in
1998. The quality comparison gave the edge to neither group. …

Finally, a 2000 study of Florida prisons
compared the private South Bay Correctional Facility, operated by Wackenhut
Corrections Corporation, with the most comparable public facility, Okeechobee
Correctional Institution. After adjusting for various differences, including
capacity, the study found that the private prison’s costs were 3.5% lower than
the state’s costs for fiscal year 1997–98 and 10.5% lower for 1998–99 meeting
the 7% cost reduction mandate established by law. Additionally, construction
costs were 24% lower for the private prison. As for quality, the study found
that South Bay had fully operational programs within six months of opening (as
opposed to three years for Okeechobee), had fewer health service deficiencies
than Okeechobee, was able to house more inmates three months after opening than
Okeechobee could house after seventeen months, and implemented an innovative
approach to housing certain "close management inmates."

There is another important factor that these studies do not
capture, and this is very relevant to the issue before the committee today.
While there is ample evidence that individual private prisons have lower costs
in "apples-to-apples" comparisons, their very existence in a state lowers costs
throughout the entire system, as public and private facilities "sharpen their
pencils" under the pressure of competition.

A 2003 study by the New Mexico-based Rio Grande Foundation
compared states on the basis of how much of their prison population is in
private facilities, and it found that as the number goes up, costs throughout
the system fall. "The credible threat of contract termination … induce(s) both
public and private prisons to carefully mind costs."[3]

The study carefully controlled for other factors and
confirmed that privatization generates savings of around 14 percent per
prisoner, or about $4,000, when 5 percent of the prison population is in private
prisons. For Michigan, this would mean savings of some $192 million. When 20
percent of the inmates are in private prisons, the savings increase to around
$8,000 per prisoner, or 27 percent. As the privatized population increases even
further, the savings continues to rise, but the "marginal return" falls off, and
the rate of cost decline decreases.

With almost 45 percent of its prisoners in private
facilities, New Mexico spent $9,600 less per prisoner in 2001 than states with
no prison privatization — a 32 percent savings over the median per-prisoner
spending nationwide. Projected on a prison population the size of Michigan’s,
this would mean savings of some $439 million in our $1.7 billion
corrections budget.

One note of caution regarding these figures: The New Mexico
study found that savings are higher in "right-to-work" states, where workers can
be employed at a unionized company without joining the union or paying union
dues. As the study explains, "In states with right to work laws, employers …
enjoy greater freedom in staffing … (and) are likely to be less burdened by the
cost of labor monopoly." Therefore the potential cost savings figures cited for
Michigan would likely be reduced. This is yet another reason that Michigan
should adopt its own right-to-work law, in addition to the huge shot in the arm
such a move would give our failing economy.

Nevertheless, by closing its only private prison, Michigan
is moving in exactly the wrong direction. Indeed, there is evidence that not
only will we forgo the immediate savings that private prisons generate, but that
we can also expect prison costs to rise faster than they would have otherwise
because we have removed the incentive to improve. A study published by
Vanderbilt University researchers in August 2003 showed that states using
privately owned or privately run prisons saw their daily cost of housing prisoners grow
almost 9 percent slower than states not using the privatization option — another
"sharpened pencils" effect.[4]

One unexpected benefit to having privately owned and
operated prisons is that they generate property taxes! For example, the Michigan
Youth Correctional Facility reportedly pays more than $1 million in total
property taxes each year to state and local government.

Another benefit is truth-in-spending. Most of the costs
associated with the Michigan Youth Correctional Facility are part of a
private-sector business contract and are therefore easily identifiable. For
instance, money spent on legal expenses — attorney’s salaries, for instance —
are factored into its overall cost structure, which can be examined easily, at
any time. By contrast, the cost of salaries earned by lawyers at the Attorney
General’s office doing work on cases involving the Michigan Department of
Corrections are not charged to the department, thus making the true cost of
providing state correctional services appear less than it actually is.

Likewise, the cost of the facility itself is "baked into"
the private contractor’s per-prisoner cost. In contrast, under the per-prisoner
cost accounting of the Department of Corrections, one would think our prisons
fell from the sky like manna from heaven, because there is no recognition of the
cost of prison construction.

One final note: Some opponents of private prisons contend
that savings are due to private contractors cutting corners and delivering a
lower quality of service. This does not appear to be the case. A review of 18 studies of prison quality in the Reason
Public Policy Institute report found that 16 of them showed private prisons
performing at least as well as government-run ones.[5] While only 10 percent of the country’s 48,000
government prison facilities are accredited by the American Corrections
Association, 44 percent of privately run facilities are accredited.[6]

Governments around the globe have been hiring private
companies to manage prison populations for decades now. Both companies and
governments have acquired the expertise necessary to negotiate, write and
supervise contracts for management. It is ironic that the state with the worst
economy, the worst business tax, one of worst business climates and perhaps the
worst "structural deficit" is moving in the opposite direction. Actually it’s
more than ironic; it is tragic and perhaps emblematic of what is behind all
those other "worst in the nation" statistics.

———————————————————

Addendum:

(After McHugh’s testimony, state Rep. Alma Wheeler
Smith, D-Ypsilanti, asked whether the prison privatization studies I cited
controlled for wage levels. In other words, she wondered, Aren’t the savings
provided by privatized prisons due to their paying lower wages to employees than
government-run prisons?)

Jack McHugh
Legislative Analyst
Mackinac Center for Public Policy

April 26, 2005

Rep. Alma Wheeler Smith
House Office Building
Lansing, MI

Dear Rep. Smith:

Following my prepared testimony in the House Appropriations
Corrections Subcommittee today, you asked whether the prison privatization cost
saving studies I cited controlled for the wage levels of employees in
government-run and privately managed prisons.

Employee compensation in any
particular geographic area is a function of the productivity of the workers
(human capital) and the strength of the general economy in the area. The
strength of the local economy is largely determined by the willingness of
investors and entrepreneurs to do business in the area, meaning they believe
it is possible to earn a worthwhile return on their money and effort. The level
of taxation in an area is one of the "terms" in the equation on which that
belief is based. The taxation level is in turn determined to a large extent by
the compensation paid by government to its employees.

Government can only pay large numbers of government
employees above-market wages by taking more in taxes from other workers,
investors and entrepreneurs. This is ultimately self-defeating, since those
workers, investors and entrepreneurs will eventually conclude that they cannot
make a worthwhile return on their capital and/or efforts and labor.

Prisons and a criminal justice system are certainly one of
the core functions that our founders would agree properly belongs to government. I think we can all agree that taxpayers are best served when the Department of
Corrections performs this function as efficiently and at the lowest cost
possible. As I explained in my testimony, a great deal of empirical evidence
indicates that the competition resulting from the existence of private prisons
in a state brings down costs throughout the system. In other words, unless
Michigan has some privatized prisons, it is likely that taxpayers are being
overcharged. This is both wrong and unsustainable.

Thank you for your courtesy during my testimony. Here are
the citations and URLs for the studies I referred to in my testimony.[7]

Sincerely,

Jack McHugh

———————————————————

Portions of McHugh’s testimony were taken or
adapted from the following Mackinac Center articles:

Lawrence W. Reed,
Michigan’s Prison Costs And What To Do About Them (Midland, Mich.: Mackinac
Center for Public Policy, Jan. 9, 2003,
http://www.mackinac.org/4959). This piece was originally published by MIRS.

Jack McHugh is a legislative analyst for the Mackinac
Center for Public Policy, a research and educational institute headquartered in
Midland, Mich. Permission to reprint in whole or in part is hereby granted,
provided that the author and the Center are properly cited.

[4]
James F. Blumstein and Mark A. Cohen, The Interrelationship between Public
and Private Prisons: Does the Existence of Prisoners under Private
Management Affect the Rate of Growth in Expenditures on Prisoners under
Public Management? (San Francisco: Association of Private Correctional &
Treatment Organizations, April 2003,
http://www.apcto.org/logos/Study.pdf).